Thursday 13 January 2022

Points experts

Asset Allocation - 2021 review & 2022 market outlook


With 2021 having begun in the excitement of vaccination campaigns, who would have forecast that, exactly one year later, the Covid-19 epidemic would generate more than 1 million new cases each day just in the US (and almost 300,000 per day in France)?

Just as spectacular was the markets’ resilience and even gains this year, particularly on the equity markets. Equity investors simply shrugged off the emergence of new variants. Delta in March and Omicron in early December did not halt the general upward movement of the indices (but did generate significant disparities between regions and sectors). Most market participants appear to remain very confident in vaccinations, which, although they haven’t slowed down Omicron’s spread, are at least helping to rein in the number of serious cases and, hence the spectre of lockdowns.

Global equities achieved a gain of 32%, driven by the developed regions of the US and Europe. The US continued to lead the way, with the year’s best showing +39%, vs. +25% by Europe. 2021 was the third consecutive year of a 15%-plus gain in the US, something that has seldom occurred since 1929.

In Europe, France finished on top with an outstanding performance of 31%. But, in fact, all EU countries performed well, driven by successive stimulus plans and a robust economic recovery.

Indeed, most global economic data have shown that, as expected, growth did indeed recover strongly as economies reopened gradually in the first half of the year. PMI-type statistics, consumer confidence surveys and company earnings all point to a more than robust economic activity.

The economic recovery was also driven by governments’ successive stimulus plans and central banks’ ultraaccommodative monetary policies (including a USD 1,900 billion plan in the US in March, for example). But the cost of these monetary policies emerged in 2021 in the form of worsening inflation. After first being triggered by basis effects brought on by the closing of economies the previous year, inflation ended up consolidating throughout the year. It even worsened in the third quarter, breaking decades-old records in the US and Europe, driven by a spike in energy prices and higher food prices.

So, is this inflation persistent or transitory? This was one of the main questions asked late in the year by both central banks and market participants. Almost all central banks ended up beginning (or announcing) a tapering cycle and/or a rate hike.

Remarkably, bond markets in developed economies held up well despite these announcements of monetary policy normalisation and the steep rise in nominal rates resulting from higher inflation.

The year’s big losers were emerging markets, in particular China, which lost 17%. China’s underperformance was due mainly to the government’s regulatory crackdown covering entire swaths of the economy, including education, finance, and technology. President Xi Jinping served notice that he intends to keep close control of the world’s largest economy for the purpose of shrinking inequalities in China.


2022 will swing between fears and hopes, driven by answers and some new questions. Inflation, the new variant, monetary tightening, the Build Back Better plan, higher wages, valuation multiples, and pricing power will all be worth keeping a close eye on. Many of them will continue this year to hold the markets in their grip.

2022 will be driven by central banks’ future stances, the question of whether or not inflation will last long enough to threaten consumer purchasing power, and the coming trajectory of global economic growth once fiscal and monetary support has run out. Some roughgoing is likely on the bond markets, which did manage to hold up in 2021, in spite of everything, and on risky assets with the shift in central banks’ attitudes. The markets have already priced in the announced hike in US interest rates, but less so a Fed decision to accelerate the shrinking of its balance sheet to rein in strong economic growth and inflationary pressures.

Shrinking central bank balance sheets means less liquidity in the economy, liquidity being one of main factors behind gains by risky assets in 2021, along with excessive savings accumulated during the pandemic.

Visibility on companies remains good for the moment. Their record earnings in 2021 are likely to extend into 2022 with earnings growth expected between 5% and 10%. Here again, it will be worth keeping a close eye on the impact on company margins of higher commodity prices and the emerged upward pressures on wages.

Based on our various market scenarios, we believe that the markets could continue to post gains, while recognising that their upside potential is limited. One thing that is certain is a sustained return of volatility, given central banks’ turnabout regarding a possibly persistent inflation, an uncertain public health situation, and a China risk, whether financial or geopolitical (e.g., tensions with Taiwan and the US).

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Malik Haddouk, Head of Multi-Asset and Convertibles Management at CPR AM & Gauthier Saint-Olive, Product Specialist at CPR AM